The National Day of Reckoning

Our nation’s financial markets barely survived the dotcom bubble in 2001 and the housing market meltdown of 2008 in what were perhaps two of the most serious financial calamities in the past 200 years.

The Sarbanes-Oxley Act and the Dodd-Frank Act were enacted as reactions to the two crises. It seems that reacting to the crisis is more palatable than preventing the crisis to begin with.

Dr. Alan Greenspan wrote “The Age of Turbulence” in which he described some of the difficulties in economic world since the end of the Vietnam War and the fall of the Soviet Union. Yet after reading his book and others about the two major crises since 2000, I am left wondering whether the safeguards were the culprits instead of the life preservers they are portrayed to be.

The Federal Reserve with its monetary policy and the federal government with its fiscal policy have attempted to provide a soft landing to our economy at various stages since the 1930’s. It seems, however, as if those policies have exacerbated our nation’s problems rather than reducing the risks to our economy and the global markets.

With fiscal and monetary policy, we seem to go from one crisis to another with the cure being worse in many cases than the disease itself. Despite the 2001 and 2008 market disasters, our nation is facing yet another perfect financial storm that will affect the lives of our citizens for decades to come.

It seems that despite the lessons learned from the last two major recessions, state and local governments have not learned a thing and fiscal and monetary policies at the national level have lulled us into a false sense of security.

Spending at the state and local levels are at an all-time high with unfunded pension obligations, deferred maintenance on government infrastructure, massive state and municipal debt, and unfunded postemployment costs make state and municipal governments the next bastion of economic disaster, the next bubble to burst.

According to the Urban Institute: “State and local direct general expenditures increased from approximately $1.1 trillion in 1977 (in inflation-adjusted 2016 dollars) to $2.9 trillion in 2016 – a 172 percent increase over 39 years. Similarly, per capita expenditures increased from $4,917 a person to $9,081 a person, an increase of 85 percent”

Unfunded pension debt of $5.2 trillion threatens the budgets of many states in the event of another recession. Beyond the debt itself is the unreasonably high expected rate of return on plan assets that public sector pensions use, typically 7.25%, compared to less than 6% in the private sector. The sheer magnitude of the liability for unfunded pensions by state and local governments would explode should a lower expected rate of return be mandated.

The American Society of Civil Engineers gave the US infrastructure a D+ rating for 2017 and estimates are that $4.5 trillion will be needed by the year 2025 to repair the damage.

The state and local debt has skyrocketed since the great recession and solvency of states is becoming a greater concern. With over $3.5 trillion in outstanding debt the fiscal health of certain states has become a significant concern.

The combination of these massive obligations and potential obligations at the state and local governments leads to the perfect storm for the next bubble bursting.

President Donald Trump has done a magnificent job of rebuilding the national economy which has been extremely robust, but it is up to the state and local governments to get their fiscal house in order before the states become the next economic disaster.

Despite the potential chaos which may ensue, the state and local fiscal crisis can be averted.

First, states need to understand that people can move. The state’s failure to fix their fiscal woes will encourage net migration from one fiscally unstable state to more fiscally stable states. Those states have already created the climate that Pres. Trump is attempting to do at the federal level and are seeing a net migration from less fiscally responsible states.

Citizens will move from one fiscally distressed state to another!

The net result of this is that those states that are overspending must get their financial house in order by reducing spending. Right to work legislation, reduced public sector pensions, balanced budgets literally rather than balancing through debt must be enacted if states hope to get their fiscal house in shape.

Second, balanced budgets must mean balancing it with revenue and not debt at the state and local level. That measure in and of itself will restrain spending and force tougher decisions that cannot be passed from one generation to the next.

Third, the Governmental Accounting Standards Board must adopt similar financial standards relative to recognizing revenue and expense as the Financial Accounting Standards Board does. Government is NOT a different type of entity than the private sector and those differences must be eliminated in financial reporting for comparability purposes.

Our economy has become dependent upon the irrational behavior of the government’s spending beyond its means, and a Federal Reserve intent upon manipulating interest rates.

Only by rationally reining in fiscal and monetary policies at the state and federal levels will our economy avoid the perfect storm.

Frank Ryan, CPA, USMCR (Ret) represents the 101st District in the PA House of Representatives. He is a retired Marine Reserve Colonel, a CPA and specializes in corporate restructuring. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected]